Archive for Wednesday, June 25, 2008

Tapping retirement savings is risky

Experts say short-term fix not worth long-term loss

June 25, 2008

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— Investors' anxiety about the economy and rising prices for gasoline, food and most other things has some thinking about tapping retirement savings to ease their current financial troubles.

It appears that the number of investors who are hitting up their retirement accounts is on the rise. The Transamerica Center for Retirement Studies reports that the number of workers with loans outstanding on retirement accounts like 401(k) plans rose to 18 percent in 2007 from 11 percent a year earlier. Anecdotal reports from financial advisers have also shown increases.

Some financial experts and lawmakers are concerned that investors grappling with spiraling credit card debt and mortgage payments are eyeing their retirement holdings as a potential financial lifeline without appreciating the gravity of tapping into something that should be all but inviolable.

Sen. Herb Kohl, D-Wis., chairman of the Senate Special Committee on Aging, has sent letters to nine overseers of 401(k) and retirement plans seeking details on how they disclose fees and risks associated with rolling over or tapping into retirement accounts. The committee, which has previously examined 401(k) fees, expects to hold hearings next month.

Dean Kohmann, vice president of 401(k) services at Charles Schwab & Co. in Richfield, Ohio, notes that many investors who borrow or withdraw money from a retirement plan risk depleting retirement savings and often only buy a short-term fix.

Making a hardship withdrawal, for example, to stave off foreclosure might only keep some investors in a home a few months longer, he notes. After that the money removed from a retirement account is taxed as income and is no longer protected from creditors as it would have been.

Even investors whose financial troubles are less onerous make mistakes such as reducing how much money they contribute to their retirement accounts when they grow uneasy about their finances.

He said the process of dollar-cost averaging - making routine contributions to investments as way to sidestep the market's ups and downs - leaves investors with great opportunity when Wall Street is weak.

"These years, as painful as they are - it's a good thing for your ultimate retirement because if you keep contributing you're buying in more shares at a lower price," he said.

Mark Davis, a principal with the financial consultancy Kravitz Davis Sansone in Los Angeles, said the firm has seen a "slight uptick" in loans and withdrawals from retirement accounts.

He said workers who borrow from their retirement accounts should at least continue making their regular contributions from each paycheck, not simply pay back what they owe.

"If you want to keep getting ahead you have to make both the loan payment and the ongoing contribution," he said.

Davis said it's important for investors to consider the implications of their moves. One of the biggest pitfalls he sees is that many investors aren't aware that if they change or lose their jobs, the balance on the loans comes due.

He said investors who can avoid raiding retirement savings should also be careful not to alter their investments based on the market's short-term moves, a perhaps difficult prospect with the stock market's major indexes down about 10 percent this year.

Besides, he said, adding to investments now means investors would likely be snapping up deals.

"It means you're shopping right now at Wal-Mart instead of Nordstrom," Davis said. "You're buying things on sale and that's great."

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